Daily Archives: March 7, 2011

Robin Harding

Atlanta Fed president Dennis Lockhart, speaking at the NABE policy conference today, provided some useful thinking about Fed exit strategy from its current easy monetary policy.

Judgments regarding when to change the direction of policy are difficult, and much of our thought and energy are devoted to getting it right. But by employing a forward-looking Taylor-rule framework, when to exit is not a particularly bewildering problem conceptually.

 

Weaning Irish banks off emergency funding from the ECB will take longer than hoped, after Irish authorities suspended plans to force the country’s troubled banks to sell off huge portfolios of loans.

The country’s banks need to offload as much €100bn ($139bn) of legacy assets as they undergo a drastic clean-up of their balance sheets following the huge losses they suffered during the financial crisis. The ECB wanted the deleveraging to be undertaken quickly so the banks could whittle down their reliance on emergency funding, which has risen to about €140bn. 

Ralph Atkins

Moody’s, the credit rating agency, has created a political storm in Athens by downgrading Greece’s government bonds by a further three notches. At B1 (down from Ba1), Greek bonds now “lack the characteristics of a desirable investment,” in Moody’s terminology.

But they are still acceptable for use as collateral in European Central Bank liquidity operations. Last May, the ECB suspended the minimum credit rating requirement for Greek debt – on the grounds that it had confidence in the country’s economic rescue plans, whatever the credit rating agencies thought. In other words, Greek banks could continue to obtain unlimited liquidity from the ECB, using their government bonds as collateral.

What is more, Moody’s announcement does not change anything in terms of the “haircut” – or discount – applied by the ECB to Greek bonds when calculating how much liquidity banks can obtain. 

Robin Harding

Data from the Treasury International Capital system have always got a lot of stick. The system is meant to show foreign holdings of US assets broken down by country (and vice versa) but has a big problem with ‘custodial bias’: it struggles to track funds beyond the financial centre where they are held, e.g. the UK, Switzerland, the Channel Islands, various dodgy Caribbean destinations etc.

Recent sanctions on Libya have created a fascinating natural experiment on just how big that ‘custodial bias’ actually is. Does the amount of Libyan assets in the US reported to TIC match up with the amount of Libyan assets frozen in the US? Answer: a resounding ‘No’. 

A managing director of Goldman Sachs will replace chief hawk Andrew Sentance as an external member of the MPC, starting a renewable three-year term at the Bank of England on June 1. Sterling is rising as the markets take the news as bullish. Note: Mr Sentance will still be voting in May’s key MPC meeting. (Read more about Mr Broadbent’s views from Chris.)

Out of 27 applications for the position, only one was from a woman.

Cambridge and Harvard-educated Ben Broadbent has been senior European economist at Goldman Sachs since 2000. “I am thrilled. It is a great honour and a great responsibility,” he told the Financial Times on Monday. “His broad professional experience in the financial sector and academia, as well as his detailed knowledge of the UK economy, will be extremely valuable to the Committee,” finance minister George Osborne said in a statement. He also thanked Mr Sentance for his “original analysis”.

Mr Broadbent worked as an assistant professor at Columbia University, and as an economist at the Treasury and the Bank of England before joining Goldman. Recent comments from Goldman’s UK Economics Analyst note, edited by Mr Broadbent strike a hawkish note: 

Two out of four ain’t bad. Ferenc Gerhardt and Andrea Bartfai-Mager are two government nominees for the central bank’s new policy board, under a new law that allows the government to appoint four rather than two of the seven-strong council. The law was sharply criticised by the ECB for potentially impacting on central bank independence.

Markets have welcomed the appointments, deemed “reasonable” by Elisabeth Andreew, chief currency strategist at Nordea. Analysts had worried the new government appointees would want to promote growth at the expense of fighting inflation; all three major agencies have cut Hungary’s government debt rating since November. The appointment of two former central bankers has reassured markets, as has their strong anti-inflation line at interviews today. 

Moody’s rating agency has just downgraded Greece’s government bonds to B1 from Ba1, placing the debt on negative outlook, meaning further downgrades are likely. The move takes Greek debt from borderline junk to “highly speculative” territory.

Fitch and S&P still rate Greek debt three notches higher at BB+ (the equivalent of Ba1, Moody’s previous rating), but this might not last long. Fitch last downgraded on January 14 and has a negative outlook on the rating, while S&P last downgraded in December but has the rating on credit watch negative (meaning a downgrade is imminent, if there is no material improvement).